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New York State Higher Educ. Services Corp. v. Lucianna


October 20, 1995


284 N.J. Super. 603; 666 A.2d 173

September 12, 1995, Submitted

On appeal from the Superior Court of New Jersey, Law Division, Bergen County.

The summary judgment from which plaintiff appealed is reversed, and the matter is remanded to the Law Division for the entry of judgment in accordance with this opinion.

Before Judges Dreier, Kestin and Cuff.

The opinion of the court was delivered by: Dreier, P.j.a.d.

Approved for Publication October 20, 1995.


The opinion of the court was delivered by DREIER, P.J.A.D.

Plaintiff appeals from an order dismissing its complaint for reimbursement of funds advanced after defendant's default on his student loans. Plaintiff was the guarantor of two student loans made by Chase Manhattan Bank to defendant in 1980 and 1981 in the total amount of $7,500. Upon defendant's default, plaintiff paid the amount due and sought reimbursement from defendant. On October 28, 1987, defendant filed voluntary bankruptcy under Chapter 7 of the Bankruptcy Code. After listing plaintiff as a creditor on his schedule of debts, defendant received a discharge in bankruptcy on March 7, 1988. On February 14, 1994, plaintiff instituted this action. Defendant raised the affirmative defense of a discharge in bankruptcy and moved for summary judgment. On February 3, 1995, the trial Judge dismissed the case. Plaintiff filed this timely appeal.

The proceeds from defendant's student loans from Chase Manhattan Bank were applied to his graduate education at Columbia University in the fall semesters of 1980 and 1981. The terms of the loan required the borrower to provide notice to the lender no later than four months after the borrower "cease being matriculated or at least a half-time student." The borrower was then required to sign a repayment note in which the repayment period would begin at the end of the ninth month following the month in which the borrower ceased to be so matriculated. In this case, defendant withdrew from school in December 1981, within two months of obtaining the second loan. He filed his bankruptcy petition on October 28, 1987. This was more than five years following the date his first payment would have been due if the date of his withdrawal was the operative date for repayment, but less than five years if the date of his anticipated graduation was the triggering date.

This case turns on a single point, a mixed question of law and fact. At the time of this transaction, the Bankruptcy Code, 11 U.S.C.A. Section 523(a)(8)(A), exempted from the discharge provisions of a Chapter 7 proceeding a governmentally insured or guaranteed education loan that first became due within five years of the filing of the bankruptcy petition. n1 If we read the provisions in the interim note requiring notice when a student withdraws from the university as extending the initial payment date, then defendant's discharge in bankruptcy was ineffective to terminate these obligations. If, on the other hand, we read the note restrictively against the bank and guarantor, then the obligations were discharged.

The initial loan agreements between Chase Manhattan Bank and defendant were written in the form of interim promissory notes which preceded the anticipated signing of repayment notes following graduation or discontinuance of the student's education. As noted earlier, there was a provision requiring the borrower to repay the loan at "the end of the ninth month following the month in which [the borrower ceased] to be matriculated, from or less than a half-time student at an approved school." The Code may bring suit in state court); Massachusetts Higher Educ. Assistance Corp. v. Taylor, 390 Mass. 755, 459 N.E.2d 807, 812 (Mass. 1984) (reasoning that because student loans are not automatically dischargeable, fact that creditor of student loans did not appear in bankruptcy proceeding to contest dischargeability did not bar creditor from bringing subsequent action in state court); Pennsylvania Higher Educ. Assistance Agency v. Kaufman, 9 B.R. 755 (Bankr.E.D.Pa. 1981); State v. Wilkes, 41 N.Y.2d 655, 394 N.Y.S.2d 849, 363 N.E.2d 555 (N.Y. 1977); State v. Perkins, 112 A.D.2d 485, 490 N.Y.S.2d 900 (N.Y. App. Div. 1985); State of New York Higher Educ. Serv. Corp. v. Quell, 104 A.D.2d 11, 482 N.Y.S.2d 373 (App. Div. 1984). But see George Washington Univ. v. Galdi, 475 A.2d 1130, 1134-1135 (D.C. 1984). Interpretation of promissory notes in this setting is a matter of State law. See Chisari v. Florida Dept. of Educ., 183 B.R. 963, 967 (Bankr.M.C.Fla. 1995).

Where an ambiguity exists, we ordinarily construe a written agreement against the preparer, here the bank and guarantor. In re Kennedy Mortgage Co., 2313 B.R. 466, 473 (Bankr. D.N.J. 1982) (loan agreement); see also

In re Miller's Estate, 90 N.J. 210, 221, 447 A.2d 549 (1982) (documents transferring an interest in royalties); Terminal Constr. Corp. v. Bergen County Hackensack River Sanitary Sewer Dist. Auth., 18 N.J. 294, 302, 113 A.2d 787 (1955) (sewerage disposal contracts); Jennings v. Pinto, 5 N.J. 562, 569, 76 A.2d 669 (1950) (sales agreement). n2 However, such a construction here would work an inJustice permitting defendant to profit by his breach of the notice provision. We take notice that it is a virtual impossibility for banks engaged in making student loans or for state agency guarantors to police the many thousands of borrowers to determine which students are still in school and which have withdrawn before graduation. Even upon receipt of a bankruptcy notice, a bank or guarantor cannot be expected to initiate an investigation of each student's status. The student is obligated by the loan agreement to keep the lender and guarantor apprised. Absent express notice by the student, the lender and guarantor, in turn, have a right to rely upon the dates of anticipated graduation set forth in the loan agreement and the date of filing of the bankruptcy petition to determine whether they need to expend the time and money required to object to a bankruptcy discharge.

Our Conclusion is in accordance with the weight of authority. In Pennsylvania Higher Educ. Assistance Agency v. Kaufman, supra, the debtor's undergraduate loan was deferred after he made three payments because he entered graduate school. He stated that he expected to graduate in May 1977, but withdrew after one semester and failed to inform the lender of his new status. After the anticipated graduation date, he signed the repayment note, but then filed for bankruptcy. He claimed that only the one semester period that he actually attended graduate school should be counted to toll the five-year period applicable to his undergraduate note, and thus he urged that the statutory five years had elapsed rendering the undergraduate debt dischargeable under 11 U.S.C.A. Section 523(a)(8)(A). The bankruptcy court agreed with the lender's argument that because the debtor had never notified the lender of the termination of his graduate studies the lender was entitled to rely on the May 1977 anticipated date of graduation. The court found that the bank had relied upon the debtor's "expected graduation date and received no communication from him that he had discontinued studies prior to that date, despite his signed agreement on the March 17 promissory Note to advise the bank of any changes in his school enrollment status." 9 B.R. at 758. The court concluded that the "debtor received a suspension of the repayment on his original loan" for the full anticipated graduate program, rather than the single semester ., per. 666, 673, 506 A.2d 817 (App. Div. 1986) (interpreting former Evid. R. 9(2) and (3)).


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